Rome’s populist government has revised its ambitious spending plans in an effort to avert EU budget sanctions.

Italy’s rising debt burden — at 132 per cent of gross domestic product the second-highest in the eurozone — is in breach of EU budgetary rules, according to an assessment by the European Commission last month, putting it at risk of becoming the first country to incur financial penalties.

Ministers reached an agreement on Monday evening on a law to adjust the budget in the hope of averting an excessive deficit procedure (EDP) by the EU.

The cabinet also approved a draft law to urgently improve the public finances by freezing around €1.5bn in savings on welfare and pension reforms, Palazzo Chigi, the prime minister’s office, said.

The agreement was reached despite divisions within the coalition, with Matteo Salvini, deputy premier, insistent on bringing in unaffordable tax cuts, the League’s flagship manifesto pledge. Tensions between the coalition partners were further strained on Monday over the decision by the Five Star-controlled ministry of transport to revoke the motorway concession of Autostrade d’Italia, over the Genoa bridge disaster last year. Mr Salvini left the meeting early and Luigi Di Maio did not participate.

Giuseppe Conte, prime minister, and Giovanni Tria, finance minister, have pledged that Italy will respect EU budget rules. “I have complete faith that [the infraction procedure] can be avoided,” Mr Conte said in Brussels on Monday.

It remains unclear whether the measures will suffice to stave off the EDP. The deadline of Tuesday was deferred by infighting after EU leaders failed to agree on how to distribute its top jobs.

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The EU’s college of commissioners was set to discuss Italy’s finances at a regular meeting this week but it has been delayed, with a Sunday summit running on into Tuesday. A senior commission official said the college meeting was likely to be “rescheduled shortly” but did not set a date.

Brussels has a limited window in which to recommend launching a disciplinary process that could result in sanctions of 0.2 per cent of GDP for Italy, although no country has yet been hit with financial sanctions.

Any decision on the EDP would need to be approved by eurozone finance ministers when they meet in Brussels next week. Further delay would mean the issue would probably have to be taken up by the incoming commission after the summer.

A prolonged clash with Brussels — just six months after a compromise averted a previous conflict — risks provoking fresh investor fears over Italy’s debt burden and its future in the eurozone.

Italian bonds rallied on Monday, as investors grew more confident that Italy would escape punishment by the EU. Government bond yields fell 8 basis points to 2 per cent, their lowest since May 2018.

Italy’s net deficit will be reduced by €7.6bn in 2019 or 0.4 per cent with respect to the government’s economic blueprint from April, the ministry of finance said.

“The package approved consists of an adjustment of the budget for 2019 which certifies a correction of €6.1bn, and the draft law of €1.5bn” in savings in lower than expected take-up of pension and welfare payments, the statement said.

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Via Financial Times